OPINION: California drives away businesses, tax receipts

Flaresun Fire Group is an innovative start-up that makes equipment designed to help first responders rescue people trapped underground or down steep embankments.

Flaresun is also notable because it’s one of the latest companies to flee California thanks to the Golden State’s punitive corporate tax rates. Between 1992 and 2008, California lost some 869,000 income tax filers.

“When you get out of the research-and-development phases, California is right on you (to pay taxes),” Flaresun CEO Lisa Mortimeyer recently told Northern Nevada Business Weekly. By contrast, she says, “Nevada has been an instant catalyst for new business ideas and new growth.”

California’s neighbor to the east doesn’t impose a personal income tax, a corporate income tax, or an inventory tax. Mortimeyer points to these three realities to explain why she’s relocating her company to Reno.

California’s high tax rates aren’t just driving companies and their workers out of the state. They may actually be delivering less revenue to the state’s coffers than lower tax rates would.

Economic data support this notion. A 2006 study of corporate tax rates in 20 developed countries concluded that corporate tax revenues as a share of GDP increased between 1965 and 2004 even as tax rates decreased.

If higher corporate tax rates yielded more revenues — as so many politicians claim — then we would expect to have seen revenues fall as rates did. Yet that did not happen.

Another study surveyed corporate tax rates in 29 developed countries between 1980 and 2005 and calculated that a 23 percent tax rate led to the greatest amount of revenue in 2003. Rates above that level yielded progressively less revenue.

Unfortunately, studies like these don’t appear to move policymakers at either the national or state level.

Last year, the United States secured the dubious distinction of having the highest average corporate tax rate in the industrialized world at 39.2 percent after both state and federal corporate taxes are taken into account. That’s nearly 14 percentage points higher than the average among developed nations. An estimated $1 trillion in corporate profits earned by U.S. corporations is overseas — and probably will not come back to this country until tax rates are lower.

State corporate taxes, of course, come on top of federal rates, which currently top out at 35 percent. Only eight states have higher corporate tax rates than California’s 8.84 percent. If high federal corporate taxes are already sapping tax revenue, the problem is compounded in high-tax states like California.

Moreover, the states with the lowest corporate income tax rates outperform the states with the highest ones on just about every economic measure. From 2001 to 2011, the seven states with the lowest marginal corporate income tax rates posted state GDP growth rates that were, on average, 21 percentage points higher than the seven states with the highest corporate tax rates. In the seven low-tax states, employment growth was more than 10 percentage points higher and population growth was eight percentage points higher.

Even though they had lower marginal corporate income tax rates, the seven states saw their tax revenue growth exceed the national average by more than 23 percentage points — and exceed the average for the seven states with the highest corporate tax rates by more than 31 percentage points.

The evidence shows that high corporate taxes constrict economic growth. Companies like Flaresun that have left California for Nevada better prepare for some company.

Arthur B. Laffer, Ph.D., is an economist who served on President Reagan’s Economic Policy Advisory Board.